Pricing and Hedging Illiquid Energy Derivatives: an Application to the JCC Index

Authors: Matteo Manera, Elisa Scarpa

Year: 2006

Series: FEEM Working Paper  n.2006-130

ISSN: 2037-1209

Keywords: Hedging models,Cross-hedging,Energy derivatives,Illiquid financial products,Commodity markets,JCC price index

JEL n.: G13,G15

 

Abstract

This paper studies the empirical relationship between consumption and saving under two different sources of uncertainty: financial risk and environmental risk. The analysis is carried out using time series data for six advanced economies in the period 1965-2007. The results support the theoretical conclusions that both financial risk alone and the interaction between financial and environmental risks affect consumption. Moreover, we suggest a solution to some shortcomings which concern the empirical analysis performed with one-argument utility functions. Finally, we provide new estimates of indexes of relative risk aversion and relative prudence, and relative preference of environmental quality.

Pricing and Hedging Illiquid Energy Derivatives: an Application to the JCC Index